Nymex light crude encountered resistance at $60/barrel. Expect retracement to test the new support level at $54/barrel. Respect would indicate a primary advance, while failure would suggest recent gains are no more than a bear market rally and another test of $44 is likely. 13-Week Twiggs Momentum below zero continues to reflect a primary down-trend.
Inflation-adjusted crude oil prices are close to their 2008 low, but if we look back to the 1980s and 1990s, prior to China’s entry into the markets (apart from a brief spike in September 1990) that was the 20-year high.
Nymex light crude rallied since breaking resistance at $54/barrel, but this does not necessarily indicate a reversal. Only retracement that respects the new support level (at $54) would confirm this a primary up-trend rather than a bear market rally.
Nymex Light Crude broke resistance at $55/barrel, signaling the end of the narrow consolidation of the past few months. Some have heralded this as the end of the bear trend and start of a bull market.
If we examine the recent consolidation — shown here on June 2015 Light Crude futures — it is clear that it is broadening, with the second trough below the first, rather than rectangular. Peaks are likely to follow a similar pattern; so a higher peak does not necessarily mean a breakout. Broadening wedges tend to be unreliable reversal signals and I would wait for retracement that respects the new support level at $55 to confirm the breakout.
Crude is consolidating in a narrow band between $44 and $55/barrel. Supply continues to exceed demand and storage facilities are approaching capacity. The bear trend is expected to continue. Failure of support at $44/barrel would confirm.
Saudi Arabia bombs its neighbor Yemen. Another war in the Middle East and crude prices rally. Nymex Light Crude retreated above support at $45/barrel, testing $50, while Brent Crude found support at $54. The Saudis are obviously concerned about the success of Iranian-backed rebels in their close neighbor and are prepared to intervene militarily (Putin will probably send a telegram of support, attempting to draw a parallel although the situation in Ukraine is vastly different). Expect further consolidation between $45 and $55 for Nymex Light Crude. Supply continues to exceed demand and storage facilities are approaching capacity. The bear trend is likely to continue despite the current interruption.
Nymex light crude (April 2015 contract) broke support at $45/barrel, warning of a decline to $35/barrel*.
* Target calculation: 45 – ( 55 – 45 ) = 35
John Morgan questions whether wind and solar are viable energy sources when one considers energy returned on energy invested (EROEI).
There is a minimum EROEI, greater than 1, that is required for an energy source to be able to run society. An energy system must produce a surplus large enough to sustain things like food production, hospitals, and universities to train the engineers to build the plant, transport, construction, and all the elements of the civilization in which it is embedded. For countries like the US and Germany, Weißbach et al. estimate this minimum viable EROEI to be about 7……
The fossil fuel power sources we’re most accustomed to have a high EROEI of about 30, well above the minimum requirement. Wind power at 16, and concentrating solar power (CSP, or solar thermal power) at 19, are lower, but the energy surplus is still sufficient, in principle, to sustain a developed industrial society. Biomass, and solar photovoltaic (at least in Germany), however, cannot. With an EROEI of only 3.9 and 3.5 respectively, these power sources cannot support with their energy alone both their own fabrication and the societal services we use energy for in a first world country.
Energy Returned on Invested, from Weißbach et al.,1 with and without energy storage (buffering). CCGT is closed-cycle gas turbine. PWR is a Pressurized Water (conventional nuclear) Reactor. Energy sources must exceed the “economic threshold”, of about 7, to yield the surplus energy required to support an OECD level society.
These EROEI values are for energy directly delivered (the “unbuffered” values in the figure). But things change if we need to store energy. If we were to store energy in, say, batteries, we must invest energy in mining the materials and manufacturing those batteries. So a larger energy investment is required, and the EROEI consequently drops…[to the buffered level].
Read more at The Catch-22 of energy storage – On Line Opinion – 10/3/2015.
Nymex Light Crude is headed for another test of support at $45/barrel. Breach would signal a decline, with a medium-term target of $35/barrel*.
* Target calculation: 45 – ( 55 – 45 ) = 35
Saturation of available storage capacity (see Crude in Contango) is expected to force sellers into the market and drive prices lower.
Nymex WTI Light Crude is testing resistance at $54/barrel, while Brent Crude is at $62/barrel. WTI above $54/barrel would signal a bear market rally, but is likely to leave the primary trend unaltered. Breach of support at $45/barrel would signal another decline.
The crude oil market is in contango, with spot prices lower than future prices, encouraging traders to store oil until prices rise. But Leslie Shaffer reports that oil storage is nearing full capacity:
“We’re going to see pretty fast inventory builds over the next few weeks,” Francisco Blanch, head of commodity research at Bank of America-Merrill Lynch, told CNBC Wednesday, noting that global supply is running around 1.4 million barrels a day above demand.
“If you run out of space, prices tend to react a lot more violently to adjust that supply and demand imbalance and that’s what we expect over the next few weeks,” he said, forecasting both WTI and Brent will fall toward $30 a barrel.
By Houses & Holes
Reproduced with kind permission from Macrobusiness.com.au
From Jeremy Grantham:
The simplest argument for the oil price decline is for once correct. A wave of new U.S. fracking oil could be seen to be overtaking the modestly growing global oil demand.
It became clear that OPEC, mainly Saudi Arabia, must cut back production if the price were to stay around $100 a barrel, which many, including me, believe is necessary to justify continued heavy spending to find traditional oil.
The Saudis declined to pull back their production and the oil market entered into glut mode, in which storage is full and production continues above demand.
Under glut conditions, oil (and natural gas) is uniquely sensitive to declines toward marginal cost (ignoring sunk costs), which can approach a few dollars a barrel – the cost of just pumping the oil.
Oil demand is notoriously insensitive to price in the short term but cumulatively and substantially sensitive as a few years pass.
The Saudis are obviously expecting that these low prices will turn off U.S. fracking, and I’m sure they are right. Almost no new drilling programs will be initiated at current prices except by the financially desperate and the irrationally impatient, and in three years over 80% of all production from current wells will be gone!
Thus, in a few months (six to nine?) I believe oil supply is likely to drop to a new equilibrium, probably in the $30 to $50 per barrel range.
For the following few years, U.S. fracking costs will determine the global oil balance. At each level, as prices rise more, fracking production will gear up. U.S. fracking is unique in oil industry history in the speed with which it can turn on and off.
In five to eight years, depending on global GDP growth and how quickly prices recover, U.S. fracking production will start to peak out and the full cost of an incremental barrel of traditional oil will become, once again, the main input into price. This is believed to be about $80 today and rising. In five to eight years it is likely to be $100 to $150 in my opinion.
U.S. fracking reserves that are available up to $120 a barrel are probably only equal to about one year of current global demand. This is absolutely not another Saudi Arabia.
Saudi Arabia has probably made the wrong decision for two reasons:
First, unintended consequences: a price decline of this magnitude has generated a real increase in global risk. For example, an oil producing country under extreme financial pressure may make some rash move. Oil company bankruptcy might also destabilize the financial world. Perversely, the Saudis particularly value stability.
Second, the Saudis could probably have absorbed all U.S. fracking increases in output (from today’s four million barrels a day to seven or eight) and never have been worse off than producing half of their current production for twice the current price … not a bad deal.
Only if U.S. fracking reserves are cheaper to produce and much larger than generally thought would the Saudis be right. It is a possibility, but I believe it is not probable.
The arguments that this is a demand-driven bust do not seem to tally with the data, although longer term the lack of cheap oil will be a real threat if we have not pushed ahead with renewables.
Most likely though, beyond 10 years electric cars and alternative energy will begin to eat into potential oil demand, threatening longer-term oil prices.
Exactly right, though in my view the equilibrium price will be more like $50 than $30 for the next half decade.
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